Among the smart cafés and the chic boutiques of Strasbourg and Paris, the people who run Europe enjoy what might be described as a sumptious existence.

With free travel, generous pensions, unchecked expenses and allowances for simply turning up for work, members of the European Parliament enjoy perks usually reserved for the chief executives of private companies.

But a series of devastating reports, to be published in the next month, will once again raise the question of profligacy, waste and mismanagement at the heart of the European Union.

The National Audit Office will report that the EU loses up to £3.5 billion of its annual £60 billion budget every year because of lax controls on funding, an inability to manage costs and little knowledge of where money goes or what it is spent on.

The allocation of cash is so compex that it takes years to get development money to the overseas projects it is supposed to help. Instead millions of pounds languish unused in obscure accounts.

The report, based on a series of damning analyses of EU financing by the European Court of Auditors, will be seized on by critics of the EU as yet another example of why Britain should loosen its bonds with the continent, not strengthen them.

But a growing chorus of pro-European voices is also now questioning themanagement and 'junket' culture of the EU, which is leading to an ever-burgeoning elite out of touch with the views or lifestyles of the vast majority of citizens.Some of the closest scrutuny will be on the lifestyle of MEPs, whose expense-account lifestyle would make the fastest-living City whizz kid blush.

Daniel Hannan, Conservative MEP for south-east England, told The Observer that British colleagues could make up to £1,000 a month tax-free profit perfectly legitimately from the remarkable 'mileage system' of guaranteed travelling expenses. Commissioners receive similar perks.

The EU allows all MEPs one first-class return air fare to Brussels or Strasbourg from the airport nearest their home every week.

But many MEPs actually book their standard air tickets weeks in advance, taking advantage of low-cost airlines which can get them to Brussels for less than £50. The 'reimbursement' of the first class air fare is paid to them nevertheless, with a 20 per cent premium on top for 'extraneous extras'.

When they arrive in Brussels, MEPs and senior staff are given a swipe card so that they can avoid queues and checking in procedures. They are then greeted by hordes of lobbyists who offer free meals and visits to sporting events. Hannan said that if he wanted to, he could dine free at the best restaurants in Brussels every day of the week. And there is more. Each MEP gets a daily attendance allowance for turning up to the European Parliament and signing a register each week, whether they are actually working or not.

MEPs who sign the register before 10pm on a Monday and leave after 8am the following Friday get a full five days' attendance allowance of £770, even if they actually spend the week in their Tuscan holiday home.

Hannan said that expenses are rarely audited and that items such as postage and travel are 'unconditional', ie paid at whatever rate the MEP chooses. Secretarial support costs are paid at £8,000 a month, giving a salary of £96,000 a year, a figure which few MEPs actually have to use to pay their office staff. The money is paid to them anyway.

'People pay their nephews, or other relatives,' Hannan said. 'The lack of scrutiny is inexcusable.' Millions of pounds of taxpayers' money is poured into the expenses black hole.

There have been half-hearted attempts to reform the system for 20 years. The latest proposal to 'consolidate' MEPs expenses and pay them only for costs actually incurred comes, though, with a typical EU sting in the tail.

MEPs agreed to an expenses crackdown on the condition that salaries were also looked at. They have now agreed a 13 per cent pay increase from 2004 to 'buy out' the high level of expenses.

Beyond that, MEPs will also pay a historically low 'EU tax' of just 17 per cent, well under half the amount of tax paid to people earning similar salaries across the continent.

Their salaries, taking account of the low tax rates, will increase by 25 per cent in total, rising to over £5,000 a month.

Even Europhiles are saying that the EU needs to sort out its own house if it is to have any hope of selling itself to the public.

But the NAO report will reveal that the organisation is a long way from achieving that. It will list a litany of projects that have gone wrong and money that has been wasted.

One section of the overall findings is expected to concentrate on the European Court of Auditors' report on the arrangements for funding countries about to enter the European Union, including Poland and Hungary.

Despite the project being worth €470 million (£300 million), the auditors found that the EU had little idea where the money had gone.

'For the programmes, the Commission does not document how or on what basis it makes key decisions such as determining the size of the grants,' the European auditor reports, before revealing that there is a 'lack of assessment by the Commission of the reliability of the budgetary accounting processes'.

Similar problems were found in the way that the Common Agricultural Policy operated, and funding arrangements for overseas development projects.

The EU failed to spend £11.6 billion of its budget last year because of the chaotic management system.

The auditors themselves, an EU body based in Luxembourg, are not above criticism themselves.

A British official, Robert Dougal Watt, who works for the auditors, circulated a document among staff last month alleging high levels of nepotism and sexual harrassment.

'The key to the undermining of the sound running of the institution has been nepotism, engaged in by several members of the Court over a period of many years,' Watt said.

'Members have secured the employment by the institution, even on posts reserved for permanent staff, of family and family members of friends.

'These individuals had no previous knowledge or experience of audit, prior to arriving in the Court.'

That, say many of the EU critics, is exactly the problem of the whole European institution.

Some of the freebies on offer to Europe's fat cat politicians:

· They can dine free every night with lobbyists at top restaurants· Up to £770 per week extra just for turning up to work · A first-class return air fare from their home country every week· Free tickets from lobbyists to soccer games and other events· £96,000 for 'secretarial support' - even if they don't use it for staff